Yum China Reports Fourth Quarter and Fiscal Year 2018 Results

Fourth quarter total revenues grew 2% or 7% in constant currency;
Fourth quarter total system sales grew 6% and same-store sales grew 2% in constant currency;
Opened 819 gross new stores in 2018

SHANGHAI, Jan. 31, 2019 /PRNewswire/ -- Yum China Holdings, Inc. (the "Company" or "Yum China") (NYSE: YUMC) today reported unaudited results for the fourth quarter and year ended December 31, 2018. Reported GAAP results include Special Items, which are excluded from adjusted measures.  Special Items are not allocated to any segment and therefore only impact reported GAAP results of Yum China.  See "Reconciliation of Reported GAAP Results to Adjusted Measures" within this release.

Fourth Quarter Highlights

• Total revenues increased 2% year over year to $1.91 billion from $1.87 billion (7% year over year increase excluding foreign currency translation ("F/X")).
• Total system sales grew 6% year over year, with 9% growth at KFC partially offset by a 2% decline at Pizza Hut, excluding F/X.
• Same-store sales grew 2% year over year, with a 3% increase at KFC and a 4% decrease at Pizza Hut, excluding F/X.
• Restaurant margin was 11.5%, as compared with 11.6% in the prior year period.
• Operating Profit increased 77% year over year to $84 million from $47 million (84% year over year increase excluding F/X).
• Reported an impairment charge of $12 million on intangible assets acquired from DAOJIA.com.cn ("Daojia"). Excluding this special item, Adjusted Operating Profit increased to $96 million from $47 million in the prior year period.
• Net Income increased to $74 million from a net loss of $107 million in the prior year period.
• Recognized a tax benefit of $36 million in the fourth quarter 2018 as a result of adjusting the provisional amount of transition tax related to US tax reform previously recorded in fourth quarter 2017. Excluding the one-time tax benefit and the Daojia impairment, Adjusted Net Income decreased 19% to $46 million, primarily driven by the mark to market loss of $27 million on our equity investment in Meituan Dianping.
• Diluted EPS increased to $0.19 from negative $0.28 in the prior year period. Adjusted Diluted EPS decreased 14% to $0.12 from $0.14 in the prior year period (36% year over year increase excluding the mark to market loss impact of our equity investment in Meituan Dianping).

Full Year Highlights

• Total revenues increased 8% year over year to $8.42 billion from $7.77 billion (6% year over year increase excluding F/X).
• Total system sales grew 5% year over year, with 7% growth at KFC partially offset by a 1% decline at Pizza Hut, excluding F/X.
• Same-store sales increased 1% year over year, with a 2% increase at KFC and a 5% decrease at Pizza Hut, excluding F/X.
• Restaurant margin was 15.7%, as compared with 16.7% in the prior year.
• Operating Profit increased 21% year over year to $941 million from $778 million (16% year over year increase excluding F/X). Adjusted Operating Profit increased 10% year over year to $855 million from $775 million (6% year over year increase excluding F/X).
• Net Income increased 78% to $708 million from $398 million in the prior year (70% year over year increase excluding F/X). Adjusted Net Income increased 9% to $606 million from $559 million in the prior year (4% year over year increase excluding F/X).
• Effective tax rate was 22.6%. Excluding the adjustment made in the fourth quarter 2018 to the provisional amount of transition tax related to US tax reform previously recorded in 2017, the effective tax rate was 26.5%.
• Diluted EPS increased 79% to $1.79 from $1.00 in the prior year. Adjusted Diluted EPS increased 9% to $1.53 from $1.40 in the prior year (14% year over year increase excluding the mark to market loss impact of our equity investment in Meituan Dianping).
• Opened 819 new restaurants during the year, bringing total store count to 8,484 across more than 1,200 cities.

Key Financial Results

CEO and CFO Comments

"We achieved a 6% increase in system sales in constant currency during the fourth quarter, marking our ninth consecutive quarter of system sales growth since the spin-off," said Joey Wat, CEO of Yum China. "This strong growth was led by accelerated new store openings and a robust performance at KFC, which delivered 3% same-store sales growth and 9% system sales growth during the quarter. Although Pizza Hut's sales remained soft, we are pleased to see same-store traffic growth of 1% and positive trends in customer feedback."

"In 2018, we aggressively expanded our footprint with 819 new stores across all city tiers, further strengthening our market position and laying a solid foundation for growth. While the macro backdrop is relatively soft, with our resilient business model and leadership in digital and delivery, we are confident that we have the right strategy and capabilities to maintain our growth trajectory and capitalize on the long-term potential of the China market," added Ms. Wat.

"Our strong sales growth and diligent cost controls across all aspects of our business led to a significant increase in operating profit during the fourth quarter. We also delivered on our commitment to return capital to shareholders with $473 million of share repurchases and cash dividends in 2018, including $191 million in the fourth quarter." said Jacky Lo, CFO of Yum China. "Looking into 2019, we are well positioned to face potential market softness while recognizing the first quarter of 2019 will be a tough lap given the excellent performance during the past three Chinese New Year holidays."

Dividend and Share Repurchase

• The Board of Directors declared a cash dividend of $0.12 per share on Yum China's common stock, payable as of the close of business on March 21, 2019 to stockholders of record as of the close of business on February 28, 2019.
• During the fourth quarter, we repurchased approximately 4.4 million shares of Yum China common stock for $145.3 million at an average price of $32.85 per share.

Digital and Delivery 

• As of December 31, 2018, the KFC loyalty program had over 160 million members and the Pizza Hut loyalty program had over 50 million members, an increase of 50 million and 15 million, respectively, year over year.
• Mobile payments accounted for 65% of Company sales in the fourth quarter of 2018, an increase of 11 percentage points year over year. Digital payments accounted for 86% of Company sales in the quarter, an increase of 14 percentage points year over year.
• Delivery contributed to 19% of Company sales in the fourth quarter of 2018, an increase of 3 percentage points year over year. Delivery services are now available in 1,118 cities, up from 900 cities in the prior year period.

New-Unit Development and Asset Upgrade

• The Company opened 257 new restaurants in the fourth quarter and 819 new restaurants for the full year 2018, driven by development of the KFC brand.
• The Company remodeled 232 restaurants in the fourth quarter and 931 restaurants for the full year 2018. Over 80% of Yum China's current store portfolio has been remodeled or built in the past five years.

Restaurant Margin

• In the fourth quarter of 2018, Yum China restaurant margin was 11.5%, as compared with 11.6% in the prior year period, primarily attributable to wage and commodity inflation and investment in product upgrades and promotions, partially offset by sales leverage, productivity improvement, and other cost savings.
• In the full year 2018, Yum China restaurant margin was 15.7%, as compared with 16.7% in the prior year, primarily attributable to wage and commodity inflation and investment in product upgrades and promotions, partially offset by sales leverage and productivity improvement.

2019 Outlook

The Company provides the following fiscal year 2019 targets:

• 600 to 650 gross new units
• Capital expenditures between $450 million and $500 million
• Effective tax rate below 28%

Conference Call

Yum China's management will hold an earnings conference call at 7:00p.m. U.S. Eastern Time on Thursday, January 31, 2019 (8:00a.m. Beijing/Hong Kong Time on Friday, February 1, 2019). A copy of the presentation will be available on the Yum China Holdings, Inc. website, http://ir.yumchina.com

A replay of the conference call will be available two hours after the call ends until 8:00a.m. U.S. Eastern Time on Friday, February 8, 2019 (9:00p.m. Beijing/Hong Kong Time on Friday, February 8, 2019) and may be accessed by phone at the following numbers:

Additionally, a live webcast and an archived webcast of this conference call will be available at http://ir.yumchina.com.

Forward-Looking Statements

This press release contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including under "2019 Outlook." We intend all forward-looking statements to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the fact that they do not relate strictly to historical or current facts and by the use of forward-looking words such as "expect," "expectation," "believe," "anticipate," "may," "could," "intend," "belief," "plan," "estimate," "target," "predict," "project," "likely," "will," "continue," "should," "forecast," "outlook" or similar terminology. These statements are based on current estimates and assumptions made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors that we believe are appropriate and reasonable under the circumstances, but there can be no assurance that such estimates and assumptions will prove to be correct. Forward-looking statements include, without limitation, statements regarding the future business plans, earnings and performance of Yum China, statements regarding the revitalization of Pizza Hut, anticipated effects of population and macroeconomic trends, statements regarding the capital structure and effective tax rate of Yum China, and beliefs regarding the long-term drivers of Yum China's business. Forward-looking statements are not guarantees of performance and are inherently subject to known and unknown risks and uncertainties that are difficult to predict and could cause our actual results or events to differ materially from those indicated by those statements. We cannot assure you that any of our expectations, estimates or assumptions will be achieved. The forward-looking statements included in this press release are only made as of the date of this press release, and we disclaim any obligation to publicly update any forward-looking statement to reflect subsequent events or circumstances, except as required by law. Numerous factors could cause our actual results or events to differ materially from those expressed or implied by forward-looking statements, including, without limitation: whether we are able to achieve development goals at the times and in the amounts currently anticipated, if at all, the success of our marketing campaigns and product innovation, our ability to maintain food safety and quality control systems, our ability to control costs and expenses, including tax costs, as well as changes in political, economic and regulatory conditions in China. In addition, other risks and uncertainties not presently known to us or that we currently believe to be immaterial could affect the accuracy of any such forward-looking statements. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty. You should consult our filings with the Securities and Exchange Commission (including the information set forth under the captions "Risk Factors" and "Forward-Looking Statements" in our Annual Report on Form 10-K) for additional detail about factors that could affect our financial and other results.

About Yum China Holdings, Inc.

Yum China Holdings, Inc. is a licensee of Yum! Brands in mainland China. It has exclusive rights in mainland China to KFC, China's leading quick-service restaurant brand, Pizza Hut, the leading casual dining restaurant brand in China, and Taco Bell, a California-based restaurant chain serving innovative Mexican-inspired food. Yum China also owns the Little Sheep, East Dawning and COFFii & JOY concepts outright. The Company had more than 8,400 restaurants in over 1,200 cities at the end of December 2018. For more information, please visit http://ir.yumchina.com  

In this press release:

• The Company provides certain percentage changes excluding the impact of foreign currency translation ("F/X"). These amounts are derived by translating current year results at prior year average exchange rates. We believe the elimination of the F/X impact provides better year-to-year comparability without the distortion of foreign currency fluctuations.
• System sales growth reflects the results of all restaurants regardless of ownership, including Company-owned, franchise and unconsolidated affiliate restaurants that operate our restaurant concepts, except for non-Company-owned restaurants for which we do not receive a sales-based royalty. Sales of franchise and unconsolidated affiliate restaurants typically generate ongoing franchise fees for the Company at a rate of approximately 6% of system sales. Franchise and unconsolidated affiliate restaurant sales are not included in Company sales on the Consolidated Statements of Income; however, the franchise fees are included in the Company's revenues. We believe system sales growth is useful to investors as a significant indicator of the overall strength of our business as it incorporates all of our revenue drivers, Company and franchise same-store sales as well as net unit growth.
• Effective January 1, 2018, the Company revised its definition of same-store sales growth to represent the estimated percentage change in sales of food of all restaurants in the Company system that have been open prior to the first day of our prior fiscal year. We refer to these as our "base" stores. Previously, same-store sales growth represented the estimated percentage change in sales of all restaurants in the Company system that have been open for one year or more, and the base stores changed on a rolling basis from month to month. This revision was made to align with how management measures performance internally and focuses on trends of a more stable base of stores. Prior period results have been adjusted accordingly.
• Company Restaurant profit ("Restaurant profit") is defined as Company sales less expenses incurred directly by our Company-owned restaurants in generating Company sales. Company restaurant margin percentage is defined as Restaurant profit divided by Company sales.

Reconciliation of Reported GAAP Results to Adjusted Measures
(amounts in US$ million, except for per share amounts)
(unaudited)

In addition to the results provided in accordance with US Generally Accepted Accounting Principles ("GAAP") in this press release, the Company provides measures adjusted for Special Items, which include Adjusted Operating Profit, Adjusted Net Income, Adjusted Diluted Earnings Per Common Share, Adjusted Effective Tax Rate and Adjusted EBITDA, which we define as net income including noncontrolling interests adjusted for income tax, interest income, net, investment loss, depreciation, amortization and other items, including store impairment charges and Special Items. The Special Items consist of impairment on assets acquired from Daojia, gain recognized from the re-measurement of our previously held equity interest in Wuxi KFC at fair value upon acquisition, income from the reversal of contingent consideration previously recorded for a business combination and tax impact from the Tax Cuts and Jobs Act of 2017 ("the Tax Act"), as described in the accompanying notes. The Company excludes impact from Special Items for the purpose of evaluating performance internally. Special Items are not included in any of our segment results. In addition, the Company provides Adjusted EBITDA because we believe that investors and analysts may find it useful in measuring operating performance without regard to items such as income tax, interest income, net, investment loss, depreciation, amortization and other items, including store impairment charges. These adjusted measures are not intended to replace the presentation of our financial results in accordance with GAAP.  Rather, the Company believes that the presentation of these adjusted measures provide additional information to investors to facilitate the comparison of past and present results, excluding those items that the Company does not believe are indicative of our ongoing operations due to their nature.  These adjusted measures should not be considered in isolation or as a substitute for GAAP financial results, but should be read in conjunction with the unaudited Consolidated Statements of Income and other information presented herein. A reconciliation of the most directly comparable GAAP measures to adjusted measures follows.

SOURCE Yum China Holdings, Inc.

Related Links

http://ir.yumchina.com